Gyroscopic Investing

FYI - article: "The iShares 20+ Year Treasury Bond ETF (NYSEArca: TLT) experienced its worst three-week outflow since it began trading in 2002".

http://www.etftrends.com/2015/03/long-t ... -outflows/

It sucks to refrain from market timing while watching the herd escape before the new announcement due Wednesday.
Still, TLT is up today.

Conflation of short with long.  Investors are stoopid.

Everybody thinks that the Fed is about to jack up interest rates.  Maybe they're right.  Maybe not.

Interestingly, until today the market was behaving as if a tight money situation were developing (everything down).  Not sure how much the dip was, but anyone close to the rebalance mark with cash might want to check their portfolios!

I for one do not care wether or not interest rates are changed. The dividend isn't all that great anyway so what matters to me is how much people are willing to pay for the bonds. If the bonds are priced low, great! I can buy more, if the bonds are priced high, great I am earning money!

sophie wrote: Everybody thinks that the Fed is about to jack up interest rates.  Maybe they're right.  Maybe not.

Interestingly, until today the market was behaving as if a tight money situation were developing (everything down).  Not sure how much the dip was, but anyone close to the rebalance mark with cash might want to check their portfolios!

According to peaktotrough.com the PP dip was 4.62% from 2/2 to 3/6. Of course it could go lower before the next peak is reached.

lordmetroid wrote: I for one do not care wether or not interest rates are changed. The dividend isn't all that great anyway so what matters to me is how much people are willing to pay for the bonds. If the bonds are priced low, great! I can buy more, if the bonds are priced high, great I am earning money!

This is obviously the healthy way to view LTTs. Ditto with gold and stocks. It's so easy to get caught up in the "Asset X is a such a drag on my portfolio" mentality when what we should be focussed on is loading up the truck when something gets beaten down. Of course you can only load up the truck so much through rebalancing if you are no longer in the accumulation phase.

Agree with Sophie that this rate hike might not happen & also think that the "maybe yes" is mostly already priced into bond levels.

I agree Barrett.  I’ll be buying TLT as it goes down for sure.  At Fidelity TLT is commission free, so I can place Buy-Limit orders for the smallest quantity (1 share).  This is very nice since I’m in the accumulation phase of my PP and constantly adding to it.  It lets me buy the dips.

Hello all - I'm a newbie to the Forum.  Could someone explain the advantage of buying a 30 year Treasury today with a 2.5% coupon vs. owning a Long Term Treasury fund given the likelihood that rates have nowhere to go but up at this point?  I apologize in advance for my ignorance.

fi50@fi2023 wrote: Hello all - I'm a newbie to the Forum.  Could someone explain the advantage of buying a 30 year Treasury today with a 2.5% coupon vs. owning a Long Term Treasury fund given the likelihood that rates have nowhere to go but up at this point?  I apologize in advance for my ignorance.

If we all had nickels for every time someone said that...

Regardless, I prefer bond funds due to the irritation of dealing with real bonds vs a simple commission-free ETF. In theory the bond market is highly efficient and liquid, but in practice, going through a broker exposes you to a ton of fees, commissions, high spreads, etc.

As to your question, a bond fund has a dividend that can rise over time as old bonds are rolled over if and when rates do start increasing in a sustained manner, so I can see that being a good reason to hold a fund vs individual bonds, but then again, this would be a liability if funds fall for 30 years, as the dividend would fall too! Gotta get out your crystal ball or make your decision based on other parameters.

Pointedstick wrote: Gotta get out your crystal ball or make your decision based on other parameters.

Like, for example, what you might actually own if you buy a fund.  See TLT considered harmful.

Pointedstick wrote:

fi50@fi2023 wrote: Hello all - I'm a newbie to the Forum.  Could someone explain the advantage of buying a 30 year Treasury today with a 2.5% coupon vs. owning a Long Term Treasury fund given the likelihood that rates have nowhere to go but up at this point?  I apologize in advance for my ignorance.

If we all had nickels for every time someone said that...

Regardless, I prefer bond funds due to the irritation of dealing with real bonds vs a simple commission-free ETF. In theory the bond market is highly efficient and liquid, but in practice, going through a broker exposes you to a ton of fees, commissions, high spreads, etc.

As to your question, a bond fund has a dividend that can rise over time as old bonds are rolled over if and when rates do start increasing in a sustained manner, so I can see that being a good reason to hold a fund vs individual bonds, but then again, this would be a liability if funds fall for 30 years, as the dividend would fall too! Gotta get out your crystal ball or make your decision based on other parameters.

It's only liquid for fatcats and banksters

I say own some TLT AND some individual bonds and compare the experiences for yourself.

I own individual bonds for my "deep bonds" and I own TLT for rebalancing.  They're both good tools.

MediumTex wrote: I say own some TLT AND some individual bonds and compare the experiences for yourself.

I own individual bonds for my "deep bonds" and I own TLT for rebalancing.  They're both good tools.

I had all individual bonds initially, but now I've started doing this too.  Buying individual bonds is too cumbersome to do on a regular basis.  Also long bonds make sense if you hold them for the full 10 years, but the costs can exceed that of TLT if you have to sell them early.

sophie wrote: Buying individual bonds is too cumbersome to do on a regular basis.  Also long bonds make sense if you hold them for the full 10 years, but the costs can exceed that of TLT if you have to sell them early.

I dispossessed myself of TLT and have all directly held bonds, but I'm a bit worried even about selling them on time. i.e. after 10 years, if I didn't get the chance to rebalance out of them.

I think it was member 6 Iron who said he felt like a right idiot for selling them and buying new ones (sticking to the plan, in other words) a couple-few years ago. It must've been difficult, though it may have paid off.

dualstow wrote:

sophie wrote: Buying individual bonds is too cumbersome to do on a regular basis.  Also long bonds make sense if you hold them for the full 10 years, but the costs can exceed that of TLT if you have to sell them early.

I dispossessed myself of TLT and have all directly held bonds, but I'm a bit worried even about selling them on time. i.e. after 10 years, if I didn't get the chance to rebalance out of them.

I think it was member 6 Iron who said he felt like a right idiot for selling them and buying new ones (sticking to the plan, in other words) a couple-few years ago. It must've been difficult, though it may have paid off.

Dualstow,

Why is this a concern of yours? It can be done with a few mouse clicks and you still have essentially the same percentage allocated to bonds but with longer duration, right?

fi50@fi2023 wrote: Hello all - I'm a newbie to the Forum.  Could someone explain the advantage of buying a 30 year Treasury today with a 2.5% coupon vs. owning a Long Term Treasury fund given the likelihood that rates have nowhere to go but up at this point?  I apologize in advance for my ignorance.

Just because you buy a 30-year bond doesn't mean you're stuck holding it for 30 years, which I think you might be thinking.  These are extremely liquid instruments.  You can buy it today and sell it tomorrow.  So can the LT Treasury fund (and they do).

So actually, there should be no big difference in terms of return.  The fund is going to give you the return of whatever the average duration of all their bonds is returning.  Likewise, bonds you own directly are going to give you the return of whatever the average duration of all your bonds is returning.  You're not protecting yourself from rate changes by owning the fund.  You're not changing anything in that regard.

So, the differences are:

1. If you own the bonds directly,.... you own them directly.  Total control.  No middle man.  Maybe a little more safety.  No possible hanky-panky (unless you do it to yourself!).
2. Expense ratio.  The fund will charge you an annual fee for the privilege of owning the bonds through them.

Winner is: owning the bonds directly.  At least for me, personally it is.

sophie wrote: I had all individual bonds initially, but now I've started doing this too.  Buying individual bonds is too cumbersome to do on a regular basis.  Also long bonds make sense if you hold them for the full 10 years, but the costs can exceed that of TLT if you have to sell them early.

What costs???  There should be none at TD or Fidelity.

Pointedstick wrote: As to your question, a bond fund has a dividend that can rise over time as old bonds are rolled over if and when rates do start increasing in a sustained manner, so I can see that being a good reason to hold a fund vs individual bonds, but then again, this would be a liability if funds fall for 30 years, as the dividend would fall too!

Could you explain this more?  If true, this makes my previous post false.  I'm not quite grasping the math of it, though.  Seems to me that theoretically the returns can only be whatever the cumulative returns of all the bonds they hold are, as I wrote above.

LC475 wrote: So, the differences are:

1. If you own the bonds directly,.... you own them directly.  Total control.  No middle man.  Maybe a little more safety.  No possible hanky-panky (unless you do it to yourself!).
2. Expense ratio.  The fund will charge you an annual fee for the privilege of owning the bonds through them.

Winner is: owning the bonds directly.  At least for me, personally it is.

You're (and PS) overlooking that bond funds have to sell their portfolio to raise cash when all the dumb money panics and sells on higher interest rates.  It will drive the NAV below that of holding individual bonds with matching durations.  That's the significant risk.  Don't know if that applies to ETFs. but certainly does to mutual funds.  And if this is systemic, it will start to depress individual bond prices above and beyond what is "mathematically reasonable".

LC475 wrote:

Pointedstick wrote: As to your question, a bond fund has a dividend that can rise over time as old bonds are rolled over if and when rates do start increasing in a sustained manner, so I can see that being a good reason to hold a fund vs individual bonds, but then again, this would be a liability if funds fall for 30 years, as the dividend would fall too!

Could you explain this more?  If true, this makes my previous post false.  I'm not quite grasping the math of it, though.  Seems to me that theoretically the returns can only be whatever the cumulative returns of all the bonds they hold are, as I wrote above.

Having owned both individual bonds and TLT over the years, it's been interesting to note the changing dividend that TLT pays. Put simply, when the 30-year rate falls, the TLT dividend falls too. When it rises, TLT's dividend rises. I expect that this happens as the fund sells old bonds at a loss to offset capital gains, rolls over old maturing bonds, and buys new ones at a higher coupon. I would guess that what's happening under the hood is exactly what you allude to, and that the average return of all the bonds is changing as a result of all this buying and selling.

Regardless, the movement of TLT's dividend is muted compared to the 30-year rate, but I've definitely observed that it moves in the same direction. Right now TLT's dividend is 2.58%. If the 30-year rate rose to 5%, I would expect, based on past performance, that TLT's dividend might rise to 4 or 4.5% over an extended time period. You would have a capital loss as the share price fell, of course, but you would be getting higher dividends. By comparison, if I buy a 30-year bond today with a 3% coupon and rates rise to 5% over the next year or so, I would have a capital loss in the bond, but the would never pay me any more than the 3% coupon, whereas TLT will.

Thus, my preference is to buy TLT when rates are fairly low to take advantage of this "feature", and once they go above 5%, I think I'll start buying more individual bonds to lock in higher coupon payments. Of course this will backfire if rates climb to 10%, but that's life.

MachineGhost wrote:

sophie wrote: I had all individual bonds initially, but now I've started doing this too.  Buying individual bonds is too cumbersome to do on a regular basis.  Also long bonds make sense if you hold them for the full 10 years, but the costs can exceed that of TLT if you have to sell them early.

What costs???  There should be none at TD or Fidelity.

Indeed.  That is my experience.

MachineGhost wrote: You're (and PS) overlooking that bond funds have to sell their portfolio to raise cash when all the dumb money panics and sells on higher interest rates.  It will drive the NAV below that of holding individual bonds with matching durations.  That's the significant risk.  Don't know if that applies to ETFs. but certainly does to mutual funds.  And if this is systemic, it will start to depress individual bond prices above and beyond what is "mathematically reasonable".

The fund has to sell their bonds to someone.  So as they are selling, someone else is buying at that same price.  And that price is going to be the same price at which an individual could sell his bond.  I do not think there's going to be a special, different price for ETFs and mutual funds.

Thus, the net asset value cannot be different than that of holding individual bonds with matching durations.  The assets are  individual bonds of various durations.  That's what they are.  The value of those assets can be calculated by adding up their prices, the prices of all those individual bonds.

Now the price of an ETF could fail to track the price of its bonds, especially in exceptional circumstances.  The price of the share of an ETF is simply whatever the next guy wants to pay for it.  What he wants to pay may be less than the NAV because he doesn't trust the management.  Or more, because it's convenient for him.  Or whatever.  The price people want to pay for things can be totally irrational.

LC475 wrote: The fund has to sell their bonds to someone.  So as they are selling, someone else is buying at that same price.  And that price is going to be the same price at which an individual could sell his bond.  I do not think there's going to be a special, different price for ETFs and mutual funds.

Thus, the net asset value cannot be different than that of holding individual bonds with matching durations.  The assets are  individual bonds of various durations.  That's what they are.  The value of those assets can be calculated by adding up their prices, the prices of all those individual bonds.

Now the price of an ETF could fail to track the price of its bonds, especially in exceptional circumstances.  The price of the share of an ETF is simply whatever the next guy wants to pay for it.  What he wants to pay may be less than the NAV because he doesn't trust the management.  Or more, because it's convenient for him.  Or whatever.  The price people want to pay for things can be totally irrational.

Aye, that is true!  Someone has to buy those bonds from the fund, eventually.  The real risk with funds then seems to be the scared money will panic when they see a -30%-50% loss on their retirement funds and since they are not holding individual bonds with a guarantee of 100% principal repaid at maturity...  well, I think they will find out the hard way that a fund in keeping a perpetual fixed duration more or less doesn't offer that guarantee.  I know I'd be FURIOUS if I lost that much on the expectation that bonds are "safer" than stocks.  Most bond funds are leveraged and are not pure Treasuries.  It's going to end in disaster.

LC475 wrote:

MachineGhost wrote:

sophie wrote: I had all individual bonds initially, but now I've started doing this too.  Buying individual bonds is too cumbersome to do on a regular basis.  Also long bonds make sense if you hold them for the full 10 years, but the costs can exceed that of TLT if you have to sell them early.

What costs???  There should be none at TD or Fidelity.

Indeed.  That is my experience.

There are no commission costs.  It's the bid-ask spread.  If you were to buy a bond then sell it a day later with the bond at the same value, you won't get what you paid for it.

Good points about the potential issues with TLT.  I admit that buying it is mostly laziness, but also because you can contribute small amounts.  I figured that as the balance increases, I can easily swap TLT shares for individual bonds in, say, $5,000 aliquots at my convenience.

sophie wrote: There are no commission costs.  It's the bid-ask spread.  If you were to buy a bond then sell it a day later with the bond at the same value, you won't get what you paid for it.

So you're saying the spreads on individual bonds is actually larger than the spread on TLT?  That's interesting.  I've avoided use of TLT because its not "pure" enough, but now I may reconsider.